The Causes and Consequences of Large Budget Deficits in Pakistan
Yaqub, Muhammad, Economic Review
In 1992-93, budget deficit amounted to Rs. 129 billion (equivalent to 9.5 per cent of GDP), and at this level it was more than twice that of Rs. 56 billion in 1989-90. On an average, Pakistan had recorded a deficit of 8.5 per cent of GDP per annum in the three years ended 1992-93.
Budget deficit represents the excess of "Government" expenditure over ordinary "Government" revenue in a given period, usually a fiscal year. The terms "Government", "expenditure" and "revenue" can, however, be so defined as to include several different components. Most economists would like to include in Government all of its layers, including public corporations that are not being run on commercial basis and engage in borrowings to finance their operations. Expenditure should cover both current and capital outlays, while revenue is defined to include tax revenue as well as non-tax revenue, like fees, surcharges and profits.
In Pakistan, consolidated fiscal accounts of the Federal and Provincial Governments and WAPDA, OGDC, NFC, PTVC and PTC recorded large deficits in the last several years. In 1992-93, budget deficit amounted to Rs. 129 billion (equivalent to 9.5 per cent of GDP), and at this level it was more than twice that of Rs. 56 billion in 1989-90. On an average, Pakistan had recorded a deficit of 8.5 per cent of GDP per annum in the three years ended 1992-93. Even if operations of WAPDA, OGDC, NFC, PTVC and PTC are excluded, the budget deficit averaged about 8 per cent of GDP in those years. These large deficits emanated from several reinforcing factors, which, for the sake of presentational convenience, can be grouped under four major headings.
The Level and Structure of Expenditure
Pakistan is one of the few developing countries where the Government is a net dissaver, i.e. its current expenditure exceed its ordinary revenue. Accordingly, it necessitates the use of private sector savings to finance a part of even its current expenditure. The main cause of deficit on the current account of the budget has been the inability of the Government to contain current expenditure within manageable limits. In the three years ended 1992-93, current expenditure increased by 66 per cent while government revenue increased by 46 per cent. With current expenditure in the base year being already 14 per cent more than government revenue, this disparity in the rates of growth meant a widening deficit in the current account of the budget. Consequently, in 1992-93, Government current expenditure exceeded total Government revenue by Rs. 32 billion or more than two per cent of GDP. I may add that Pakistan is one of the very few developing countries which cannot meet even its current expenditure from its current revenue.
The two main current expenditure items are defence and interest payments. While defence expenditures are mainly determined by national security considerations dictated by external factors, interest payments are a home made affair. Pakistan's interest payments rose at a very fast rate in the last several years with the result that in 1993-94 interest payments are projected to surpass total defence expenditure. The main reason for the phenomenal expansion in interest payments is that governments indulged in large scale borrowings to finance rising expenditure; and it is here that the problem began to get out of hand. Government borrowing, while helpful in maintaining a high expenditure level without a commensurate tax effort in these years, created a major problem for subsequent budgets in the form of rising interest payments. As a result, by 1992-93, 41 per cent of tax revenue had to be set aside for interest payments alone and it is projected to go up to 45 per cent in 1993-94. It may be noted that it is domestic debt that has become more burdensome. Out of interest payments of Rs. 74 billion in 1992-93, domestic interest payments amounted to Rs. 60 billion or over 80 per cent of the total.
On the development side, big projects, some of them prestige projects with questionable economic justification, began to lock-in huge expenditure outlays leading to larger budget deficits and neglect of the social sectors like health, education and population planning. …